We are now in the thick of the Q3 earnings season, and Tesla (TSLA) has set the tone for “Magnificent 7” stocks with better-than-expected numbers. Next week is particularly busy for investors in the coveted group, as Alphabet (GOOG), Amazon (AMZN), Meta Platforms (META), and Microsoft (MSFT) will all report their quarterly numbers.
With a YTD gain of 17%, Alphabet is the third worst-performing stock among the Magnificent 7 - faring worse than only Tesla, which has been oscillating between gains and losses, and Microsoft, which is up only about 13%. However, GOOG is the cheapest stock in the group, a dubious distinction that historically rested with the Facebook parent, Meta Platforms.
While Alphabet faces several headwinds – including regulatory scrutiny, where it obviously cannot do much – markets have also been concerned about the company’s core advertising business and the evolving artificial intelligence (AI) endeavors. From this perspective, the Q3 confessional will be an opportunity for Alphabet management to address the pessimism around the company.
In this article, we’ll see what analysts expect from the Google parent, and the key metrics investors should watch for in the Q3 release.
Alphabet Q3 Earnings Estimates
Analysts expect Alphabet to report revenues of $86.3 billion in Q3, a YoY rise of 12.4%. Analysts’ estimates imply GOOG’s revenue growth falling to the lowest in a year. Brokerages are modeling the company’s topline growth to fall further to 10.9% in Q4.
The company’s per-share earnings are expected to rise by 18.1% YoY in Q3 and 23.2% in Q4.
Along with those headline numbers, I would watch out for the management’s commentary on the following:
- Digital ad market outlook: It will be crucial to watch for Alphabet management’s comments on the digital ad market, as any slowdown in its core business could negatively impact its earnings.
- YouTube earnings: One of the key reasons GOOG stock fell after the Q2 earnings report was the subpar performance of YouTube. The company has increased the maximum length of Shorts from 1 minute to 3 minutes, which should help in better monetization. During the Q3 earnings call, I would watch out for commentary on how Alphabet plans to monetize YouTube better.
- Cloud business: Cloud is among the fastest growing businesses for Alphabet, and it would be pertinent to watch its growth trajectory.
- AI monetization: While tech companies have been pouring billions of dollars in AI capex, most have yet to show any meaningful returns on these investments. During the Q3 earnings call, I would follow Alphabet management’s commentary on the monetization of its AI investments, as well as advancements to its models.
GOOG Stock Forecast
Alphabet has a consensus rating of “Strong Buy” from the 47 analysts covering the stock. It is rated as a “Strong Buy” by 36 analysts, while 3 more rate it as a “Moderate Buy.” The remaining 8 analysts rate the stock as a “Hold” or some equivalent.
GOOG’s mean target price of $202.33 is 23% higher than Wednesday's closing prices, while the Street-high target price of $225 implies an upside of almost 37%. The stock even trades below its Street-low target price of $170, which shows the extent of the pessimism towards the company.
Can Alphabet Stock Rise to $200 in Q4?
Consensus estimates call for GOOG stock to rise above $200 over the next 12 months. While the probability of Alphabet stock hitting that price level in Q4 looks low, the stock should eventually hit that level in 2025, given its tepid valuations and reasonable growth outlook.
While Alphabet continues to face regulatory heat, with a breakup of the company even being floated as one of the options, I believe the stock’s valuations seem to bake in all the negatives. GOOG stock trades at a next 12-month price-to-earnings (PE) multiple of 20.2x, which is even below the S&P 500 Index ($SPX).
Alphabet has several growth drivers that are currently not contributing to its bottom line, such as the Waymo self-driving unit that has partnered with Uber (UBER) to offer driverless ride-hailing in Atlanta and Austin. Cloud could be another growth driver for Alphabet; that segment posted quarterly revenues of $10 billion in Q2, and an operating profit of $1 billion for the first time.
Some Analysts Are Getting Bullish on GOOG Heading Into Q3 Earnings
Some brokerages see Alphabet stock as a buy heading into its Q3 earnings. Citi, for instance, listed the company alongside Uber and Amazon as top picks ahead of their Q3 earnings. Evercore ISI also named GOOG stock as a “tactical outperform” heading into the Q3 confessional. The brokerage expects a rebound in Alphabet stock amid tepid consensus expectations and its underperformance versus Big Tech peers during the quarter.
All of that said, while the regulatory challenges add an air of uncertainty around Alphabet stock, I find it to be a good buy at these prices, with attractive risk-return payoffs. While it is risky to make short-term bets around earnings, I would expect the stock to rebound post-Q3 earnings, even if the numbers turn out to be marginally softer than expected - given GOOG's reasonable valuations and the overall tepid expectations.
On the date of publication, Mohit Oberoi had a position in: GOOG , AAPL , META , MSFT , NVDA , TSLA , AMZN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
